Western Europe

All of the major stock markets in Europe outperformed Wall Street and Japan as they surged strongly in the summer, anticipating economic recovery following the near collapse of the ERM, which heralded lower interest rates. Most European bourses experienced a further spurt up in December and set their 1993 highs in the last week of the year. An overall gain of more than 40% shown by the Euro Top-100 Index, since the January low, was matched or exceeded by many European bourses during 1993. The best performance among larger European bourses was seen in Sweden and Spain, which toward the end of the year were 54% and 51% higher, respectively, than they had been at year-end 1992. Germany, with a 41% increase over the same period, was also a good performer.

The London Stock Exchange (LSE; for Financial Times Industrial Ordinary Share Index annual average, see Graph VIII) lagged behind its continental European counterparts, as the share prices had risen by 20% during the previous autumn after the pound withdrew from the ERM and interest rates fell by three percentage points. Thus, the Financial Times Stock Exchange (FT-SE 100) Index in London fluctuated narrowly in the first seven months of the year between 2800 and 2950--rising when traders sensed interest rates might be cut and retreating when hopes were dashed or company profits were disappointing. In the spring the index tested the psychologically important 3000 level on hopes of an early cut in German interest rates, but it fell back when these did not materialize. The FT-SE drifted throughout the summer, as economic activity proved to be sluggish and there was no change in policy to stimulate the economy. In August, when the German interest rates were cut, the FT-SE rose strongly, and by early September it was 10% higher than the July low. By early November the FT-SE 100 Index stood at 3200, but this level could not be sustained, and it fell back to under 3100 as the market was perceived to be ahead of the recovery in company profits. Uncertainty was injected ahead of the unified budget on November 30. In the event, the budget was a major stimulus as tax increases were less than feared and the chancellor of the Exchequer aimed to reduce the public-sector deficit more quickly than previously planned. The FT-SE 100 Index soared to its highest-ever level of 3462 and finished the year at 3418.4.

In Germany, despite the deepest recession in 50 years, investors were rewarded by a 41% gain in 1993, as measured by the FAZ Aktien Index. In the opening months of the year, the FAZ Aktien Index rose from around 600 to 650 on hopes of interest rates easing following agreement on measures to reduce the public-sector deficit. A setback in late March was followed by three months of drifting as the economic indicators worsened and company profits slumped. In the summer, as the tension within the ERM grew and the French franc fell to its floor against the Deutsche Mark, the markets anticipated a cut in interest rates and recovered. Although the Bundesbank cut the discount rate by a paltry 0.5% in early August, the market soared as investors anticipated that other European countries had more room to reduce interest rates. This, in turn, was expected to benefit German exporters. By November the FAZ index had breached the 800 level, despite disappointing news on the economic front and a cautious approach by the Bundesbank to cutting interest rates. Factors that stimulated prices in the autumn included expectations of further interest-rate cuts, restructuring by companies that would improve their competitiveness and profitability, and external demand, particularly from U.S. investors. By year’s end the market had consolidated at around the 850 level.

The Paris Bourse also registered a gain (of more than 20%) during 1993. Although the Bank of France was too cautious in cutting interest rates and the old "franc fort" policy survived the revision to the ERM, investors still remained optimistic of further cuts. The CAC 40 Index entered the year strongly and by March stood at 2010, showing a gain of 13% from the January low. The market was encouraged by the small cut in German interest rates and by the legislative election results. In the spring it lost most of the gains as the recession deepened, unemployment mounted, and corporate profitability headed for an estimated 15% fall on top of a 25% decline in 1992. The desire to maintain the franc/Deutsche Mark exchange-rate parity kept interest rates artificially high and exacerbated the recession. The surge in the market in August and September, up to a new high of 2230, reflected France’s freedom to pursue a more independent line in the new era of wider ERM bands. The market entered a volatile phase in the autumn and fluctuated between 2050 and 2230 as it was influenced by conflicting sentiments of uncertain economic outlook. Sentiments improved in December and, after setting a new high of 2282 on the 27th, the CAC 40 ended the year at 2273.

The Swiss and Austrian stock markets had risen by 47% and 37%, respectively, since the end of 1992. The purchase of equities was seen by investors as a way of gaining international exposure with limited risks. The banks and pharmaceutical companies that dominated the Swiss market were perceived to be strong beneficiaries of lower interest rates. Likewise, the strong Swiss currency was a safe haven against the turbulence in other European currencies (see Graph V).

The Benelux countries benefited from a combination of low inflation, declining interest rates, and projected economic recovery. The Netherlands, in particular, was seen as a Germany without the burden of the unification and finished the year with a similar gain. The Belgian market rose more modestly, with an increase of 30%.

Floating exchange rates and lower interest rates since autumn 1992 improved the export earnings of most Scandinavian countries and signaled a recovery ahead of the rest of continental Europe. Finland was the star performer, with a rise of over 90% as it continued to recover from the sharp falls caused in 1991 by the collapse of the Soviet Union. Ironically, the severity of the recession in Sweden and cost cutting in industrial sectors was expected to improve company profitability and made it attractive to the international funds. Both the Swedish and Norwegian markets rose by more than 50% during 1993, while Denmark registered a slightly smaller gain (40%).

The southern European bourses also proved sensitive to lower interest rates and currency devaluations. Spain was among the best performers in 1993, with a 51% gain as it looked relatively undervalued early in 1993 following a large decline in 1992. Investors were also encouraged by the Social Pact between the government and the unions to moderate wage rises and reform Spain’s rigid labour laws. In the longer term, it was hoped that these measures would accelerate Spain’s integration into the EC. Italy bounced back to a yearly high in August of 633, then fell below 600 as sentiment was adversely affected by political crises and financial scandals that refused to go away. It staged a partial recovery to end the year at 619.

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